Structural gravity and trade agreements: does the measurement of domestic trade matter?

Series: Working Papers. 2117.

Author: Rodolfo G. Campos, Jacopo Timini and Elena Vidal.

Published in: Economics Letters. Volume 208, Nov 2021, Art 110080

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Structural gravity and trade agreements: does the measurement of domestic trade matter? (361 KB)

Abstract

Economic theory suggests including domestic trade flows when estimating structural gravity models. The inclusion of domestic trade flows helps to identify parameters that cannot be estimated with international trade flows alone. The complication is that domestic trade flows can be measured empirically in different ways. Does it matter which one is used? We compare the three most common approaches to measuring domestic trade and show that they lead to very similar estimates of the parameters that are usually estimated within a structural gravity framework.